Hello, can anybody explain how the GW options are priced? Puts have a much higher IV than the calls and there is a pending merger with "PDS". Thanks
Hi, actually at IB there are more than 1 million shares available to borrow. Another thing is that GW is increasing and at the same time the GW puts (eg. Jan09 7.5, 5 and 10 put) are also increasing. For the reversal (short GW, long call Jan09 7.5, short put Jan09 7.5) you get a credit of ~10$ per reversal. (Fees for borrowing GW stock are very low).
Why don't you just arb it then!? If it works then great and if IB slaps on a huge fee for shorting then you'll learn your lesson, so to speak.
Problem ist that I'm not sure if it's really an arb. There is a pending merger and it's still not clear what the price will be. There are different outcomes possible and therefore it can happen that the new underlying/delivery after the merger can be different than the price that pays PDS for GW. So I'm interested in how the market or the market maker is pricing the options.
See www.optionsclearing.com and search for GW. This is an election merger where any right minded holder of the stock will elect the $9.02 cash option (subject to proration). Since option holders typically recieve the consideration given to non-electing shareholders, the post-merger options will almost certainly settle for .4225 shares of PDS which are worth roughly $2.81. Thus the post-merger 5 puts should be around $2.19. A lot of folks have seriously mis-priced the January 5s.:eek: I was able to buy a bunch for around $1.40 and bought the PDS shares to put to the options. I believe the rise in price is the market correcting to the most probable fair value betting the deal will be approved. That said, I'm not sure shareholder approval is a slam dunk and I have seen the BOD change the rules at the last minute to fix an obvious inequity. Hope this info is useful.
@DesertTrader Info is very useful - thnkas! Isn't such a huge dicrepancy between that what electing and non-electing stockholders get unfair. Some days ago it was possible to short the put vertical 7.5 - 5 (short - long) for 2.5 and at the same time it was possible to short the call vertical (short 2.5; long 5) for 2.4!! Or is here the big risk in the short call 2.5 options which will be pinned before the election? Thanks
This is a horrible bet imo and is essentially a delta bet when you analyse it. Why trade options to trade delta? What if PDS loses .50?
Because with high IV, low price and Mr. Log Normal there are times it makes more sense to use options than the underlying.
I am not talking about DessertTrader bet. He made a great trade but you have to know what the stock tie was when the bet was made. Imo, if all you are doing is putting this trade on now, you are just making a delta bet.